June 4, 2009

Obama Motors II

Here is another scenario where I need some help. I am not an economist, nor have I run an automotive company. Neither has anyone on the Obama Automotive Task Force, by the way. On the other hand, I have spent a good portion of my life in sales and marketing.

As I understand the automotive retail business, a dealer is given a franchise to sell a brand of vehicles. He buys the cars from the manufacturer at a discount, but the dealer owns the car until he can sell it to me, Joe Consumer. The dealer also owns a parts inventory to repair the cars he sells (the real money maker).

I understand that by having fewer dealerships that allows the surviving dealers to have less competition. By any business model this means he CAN charge a higher price for his car.

Herein lies is my confusion. At any given period in time there are X number of people looking to by a car. That means only X cars will be sold. How does eliminating dealerships sell more cars for the manufacturer? If I am going to buy a car I go first to the local dealer. If he does not have the price or model I want I expand my search. Many people are brand loyal, some are not. The latter will likely buy local, so if there is a Ford dealer in town he gets the business when the GM and Chrysler dealerships go. But in the end, the car market is only what the consumer wants to buy at a given time.

In fact, since the dealer buys the cars from the auto maker, then fewer dealers will mean fewer cars sitting in dealer inventories and the demand on the maker will actually decrease. If there are three GM dealers in a fifty mile range, all have to carry a certain amount of inventory to entice me, Joe Consumer to buy. If I am looking for a Chevy Malibu, then I can price them at each dealer and choose the features and color based on who has the car in stock. I can negotiate a price and order the car if I choose. But I have choices. More importantly GM has sold THREE Malibus to the three dealers. If two of those dealers close, then the remaining one likely makes more money on the sale since there is no competition, but GM only sells one Malibu to one dealer. They have lost two thirds of their sales. But no matter how many dealerships there are, GM will only sold one Malibu to the end consumer. The number of dealerships has no effect on the demand in the marketplace.

I do understand that in a down economy the dealers will not order more cars from the manufacturer until their existing inventory moves. Again, that is a function of the end consumer. Demand will drive those orders and fewer dealers is only a very, very short term fix. As soon as the demand increases the net effect of fewer dealers will do more harm than good. If you cut off your leg at the ankle you no longer have an issue with that rusty nail in your foot, but long-term that may have not been the best solution.

The real driver of the industry is enticing the consumer to buy, not the number of places he can buy. GM and Chrysler's problem arise from the product offering, quality, and price -- not the number of dealers. The two are not related. In fact, from a marketing point of view, the auto makers should want the consumer to have more choices to buy, not fewer (the salesman wants fewer choices so he can command a higher price, but that is a different side of the coin). Every time the consumer sees a new Ram or Durango or Corvette, that is a time that the consumer might think "I sure like that truck or car, maybe I will buy one". One axiom is true in marketing -- out of sight, out of mind. Why do you think companies advertise?

The bottom line is this. How will fewer dealers increase sales for the auto companies? Will GM charge more to the remaining dealers, because that is the only way I can see that makes any sense. That will increase profitability to the maker, but is no guarantee of end sales. If that is the case, the price of a GM product will be passed to the consumer and he will then buy a Ford or Honda or a Toyota.

Either I am wrong on some basics facts, or my 20 years in sales and marketing have been wasted, because I don't know a damned thing. Help me understand, readers.